Business structures: Rules and regulations for foreign businesses

STRUCTURES USED BY FOREIGN COMPANIES: Foreign entities have the option of carrying out business in Kuwait in one of the following ways:

• Through a limited liability company (WLL);

• Through a Kuwait shareholding company (KSC);

• Through a joint venture;

• Under the sponsorship of a registered Kuwaiti merchant (Kuwaiti agent); and

• Under foreign direct investment (FDI) Law No. 8 of 2001, as amended.

WLL COMPANY: A WLL is an entity in which the liability of its members is limited to the extent of their share capital contributions. Foreign entities can have a maximum shareholding of 49% in a WLL company. The articles of association of a WLL company sets out, among other details, its objects, capital, members and management. Ownership is evidenced only by this document, and no share certificates are issued. The minimum number of members is two and the maximum number is 30. The management of a WLL is entrusted to one or more directors named in the articles of association or appointed by the members. If the number of members in a WLL is more than seven, then a control board of at least three members must be formed. The minimum capital requirement is KD7500 ($27,000), but in practice the amount of capital needed to register a new company may be higher, depending on the nature of the business. A WLL cannot engage in banking or insurance activities and cannot be listed on the Kuwait Stock Exchange (KSE). There is no restriction on distribution of profits, other than that a minimum of 10% must be transferred to a statutory reserve until it totals 50% of the capital. SHAREHOLDING COMPANY – PUBLIC OR CLOSED: A shareholding company is a limited liability joint-stock company and is commonly referred to as a KSC. The minimum number of shareholders required to establish a KSC is five and there is no limit to the number of shareholders. Admission of any foreign capital is subject to the approval of the Ministry of Commerce and Industry (MCI) and is restricted to a maximum of 49%. Approval of the Central Bank of Kuwait is required to establish a bank or an investment company involved in financing and lending activities.

The minimum capital required to establish a KSC (that is not a bank or an investment company), is KD37,500 ($136,000), but in practice the MCI will require a higher amount of capital. A minimum of 20% of the capital should be paid upon subscription and the balance within five years. A minimum capital of KD15m ($54.5m) is required to establish an investment company. A KSC is allowed to be listed on the KSE subject to fulfilling the rules and regulations of the stock exchange and the Capital Markets Authority.

The shares in a KSC cannot be sold until the issue of the company’s first balance sheet covering at least 12 months. Founders of the company are not permitted to sell their shares for three years from the date of incorporation of the company. The management of a KSC is entrusted to a board of directors comprising no less than three members with terms that do not exceed three years. General assembly meetings of shareholders should be held at least once a year to discuss, among other matters, the board of directors’ report on the activities and the financial position of the company, annual financial statements, the auditor’s report, dividend distribution and appointment of the board of directors and the auditors. A minimum 10% of the net profit for the year must be transferred to the statutory reserve until the reserve totals at least 50% of the capital and 1% of the remaining profits should be contributed to the Kuwait Foundation for the Advancement of Sciences. Another 1% is required to be paid as zakat, the Islamic principle of giving a portion of one’s income to charity. Companies listed on the KSE are also required to pay 2.5% of net profits as national labour support tax.

JOINT VENTURES: Foreign entities are able to carry out business in joint ventures with Kuwaiti entities under the trade licence and sponsorship of the Kuwaiti member of the joint venture, or in partnership with other foreign entities, by appointing a Kuwaiti sponsor or agent. Foreign entities looking to set up joint venture associations are required to nominate an individual to act as a nominee on behalf of the foreign entity. The nominee can be a foreign national. A joint venture is an unincorporated entity with separate legal existence that cannot be registered with the MCI.

SPONSORSHIP ARRANGEMENT: Under the sponsorship arrangement, a Kuwaiti merchant or entity must be appointed as an agent of the foreign entity. The agency agreement has to be drafted setting the authority and responsibility of the principal (foreign entity) and of the Kuwaiti agent. The foreign entity wishing to open an office to conduct business and commercial activities in Kuwait must act through the Kuwaiti agent under whose name and sponsorship the operation is carried out. It is normal for the Kuwaiti agent to provide local support including fulfilling the local regulatory requirements and arranging for work permits. Remuneration of the Kuwaiti agent and other terms of the agreement is a matter of negotiation between the two parties. It is normally a fixed fee or based on a percentage of revenue earned by the foreign entity.

BRANCHES: Foreign companies are not allowed to establish a registered branch office in Kuwait. However, branch operations can be carried out by a foreign entity through sponsorship or under the FDI Law.

FDI LAW: The FDI Law No. 8 of 2001 allows 100% foreign ownership for the following activities and projects:

• Industries other than oil and gas exploration and production;

• Establishing, operating and managing infrastructure projects;

• Banks, investment and exchange firms that the Central Bank of Kuwait has approved to be established;

• Insurance companies that the MCI agrees to establish;

• IT and software development;

• Hospitals and medicines;

• Tourism, hotels and entertainment;

• Culture, media and marketing except newspapers, magazines and publishing establishments;

• Housing projects and development areas except real estate speculation; and

• Real estate investments through the foreign investor’s share in the Kuwaiti public companies as per the provisions of Law No. 20 for 2000.

ACCOUNTS & AUDIT: Kuwait adheres to international financial reporting and international standards for auditing. Accounts must be audited annually and filed with the MCI for a trading licence to be renewed in the case of both shareholding and WLL firms.

Under the recently issued regulations, companies to whom the Capital Market Law applies must rotate auditors every four years. Furthermore, the auditors cannot provide any consulting services to the company.

TAXATION: Income tax is levied under Law No. 3 of 1955 and is applied to foreign companies that are conducting trade or business within Kuwait either directly or through an agent. Entities that are fully owned by Kuwaitis or GCC nationals are exempt from taxation.

WHAT IS TAXED: The following is taxable in Kuwait: • Profit earned from any activities or businesses wholly or partially executed in Kuwait, including income earned from the supply and sale of goods or services whether the contract has been concluded inside Kuwait or abroad;

• Royalty, franchise, licence and similar fees earned;

• Commissions or fees earned from representation or brokerage agreements relating to Kuwait;

• Profit from any industrial or commercial activity;

• Profit from sale or transfer of assets, including shares in a company whose assets are principally formed of immovables in Kuwait (profits from shares listed on the KSE are, however, not taxable);

• Income earned from lending of funds in Kuwait;

• Profit from trade of goods or property, including rights associated with tangible or intangible assets;

• Income earned from having a permanent office in Kuwait where sale and purchase contracts are concluded, including the place of work where activity is carried out or contracts concluded (regardless of whether such a place of work is owned, leased or belongs to a third party);

• Profit from leasing of any movable or immovable property for use in Kuwait; and

• Profit from rendering of services including fees from administrative, technical or consulting services or contracts carried out wholly or partially in Kuwait (irrespective of whether the contract carried out is signed inside Kuwait or abroad). Capital gains from trading in securities on the KSE are exempt from tax.

ACCOUNTING RECORDS & TAX DECLARATION: Taxpayers are required to maintain accounting records in Kuwait, which are subject to inspection by tax department officials. These accounting records may be in English and may also be computerised.

A tax declaration must be submitted within three and a half months following the end of the taxable period or an extended period if the director of income taxes has been informed and has given prior approval. For tax periods beginning after February 3, 2008, tax is levied at a flat rate of 15% on the net profit.

PAYMENT OF TAX & PENALTIES: Taxpayers have the option of paying their taxes in full at the time of filing their tax declaration. Alternatively they can pay tax in four equal instalments due on the 15th day of the fourth, sixth, ninth and 12th months from the end of the taxable period. If tax declarations are not filed on time, a delay penalty for every 30 days or fraction thereof is levied for delay in filing the tax declaration. Additionally, a similar penalty of 1% applies for any delay in the payment of the income tax due.

DOUBLE TAX RELIEF: Kuwait has signed double-tax avoidance treaty agreements with several countries, providing benefits including tax exemptions if a company’s presence is limited to a certain period of time, excluding material supplies from being taxed in Kuwait; and lower rates of tax on royalties and interest earned.

WITHHOLDING TAXES: There is no withholding tax in Kuwait other than the requirement for investment funds, investment custodians and companies managing portfolios for foreign entities to deduct 15% (or the appropriate percentage applicable under the double tax treaty) of dividends and to deposit this amount with the country’s Tax Department.

TAX RETENTION: All government departments, entities and individuals making payments to parties with whom they have entered into contracts, agreements or transactions are required to withhold 5% of such payments as tax retention. The parties can recover the retained money, but only after submitting a tax retention release letter issued by the tax department. If the 5% tax retention is not made, then the related costs will not be allowed to be tax deductible.

Additionally, any entity that fails to withhold the retention shall be liable to pay the tax in case the taxable entity fails to settle its taxes.

DEDUCTIONS & RESTRICTIONS: Expenses directly incurred in carrying out trade or business in Kuwait, subject to the limits specified in the tax law and regulations, are allowed as a deduction in computing taxable profit, provided that the expense claimed as a deduction is:

• Necessary for earning the revenue;

• Real and supported by proper documents; and

• Related to the taxable period. The following are some of the limits and restrictions on the deduction of expenses:

• Deduction for imported material costs is generally restricted to 85% to 96.5% of the corresponding revenue depending upon whether the materials are purchased from the head office, related entities or third-party companies;

• Deduction for fees/commission paid to agents and/or sponsors is restricted to 2% of direct revenue less sub-contract work executed by the agent;

• Deduction for design cost is restricted to 75-90% of design revenue depending upon whether the work is carried out by the head office, by a related entity or by a third party;

• Depreciation is allowed at rates specified in the tax regulations;

• Deduction for end-of-service indemnity and leave pay is restricted to the amounts specified under the Kuwait labour law;

• Penalties and fines paid are not allowed as a deduction; and

• Provisions and reserves are normally not allowed as a deduction.

TAX FILING & APPEAL PROCEEDINGS: All entities, including those that carry out activities that are exempted from tax under the Tax Decree (trading in securities listed on the KSE) or Double Tax Treaty or any international treaty or any other laws, are required to prepare and file tax declarations each year within three and a half months from the end of the tax year. The tax declaration has to be filed with the following:

• Report from an auditor registered with the MCI and approved by the Ministry of Finance;

• Financial statements;

• Trial balance;

• Statement of fixed assets;

• Statement of subcontractors that show the name, address, value of work performed during the taxable period, retention held and copy of last payment certificate;

• Inventory statement showing stock quantity and amount;

• Details of contracts in progress showing the income and expenses relating to each contract;

• Copy of last payment certificate issued by project owned; and

• For insurance companies, statement showing details of reinsured policies and their terms. The Income Tax Department then inspects a corporate body’s books and records in order to verify the income and expenses reported in the tax declaration.

CUSTOM DUTIES: Under the unified regulations, except on products that attract a higher duty, a 5% Customs duty on cost, insurance and freight value is levied at the point of the goods’ entry into the relevant state.

INCOME TAX REGULATIONS: Since 2008, when the tax rate was reduced to a flat 15%, the Kuwaiti tax authorities have issued a number of executive rules and circulars primarily relating to registration with the tax authorities, taxing of dividends, interest income, deduction of expenses and tax retention.

TAX REGISTRATION: All foreign entities are required to register with the Kuwait Income Tax Department within 30 days of commencing business.

DIVIDEND INCOME: Dividend income distributed by companies listed on the KSE is subject to tax at 15%. Investment funds, investment custodians and companies managing portfolios for foreign entities are required to make the deduction of tax and deposit this with the tax department.

In addition, individuals and 100%-GCC-owned investors are not subject to tax on dividend Income.